Budget 2017: After demonetisation, a carrot by way of banking transaction tax on 1 Feb?

Listening to Narendra Modi's speech to NRIs in Japan last week, many would have wondered if the prime minister is not in touch with what is happening back home. His joke about people not having money to conduct weddings in the family, coming across in particular as insensitive.

Since his return, the NDA government has tried to get its act together. Micro ATMs have been deployed in semi-rural areas and the limits for withdrawal have been increased. To check on cash hoarding, incredible India is turning into indelible India, with the ink that is used to check voter fraud in elections being used on the fingers. A terrible move in terms of optics and messaging and is annoying citizens to no end.

That the BJP is invested in this big ticket move is obvious from the manner in which Amit Shah is reportedly supervising the nuts and bolts of 'Operation Demonetisation'. If there is anyone in the political establishment who perhaps has an inkling of Modi's mind, it is Shah.

Budget 2017: After demonetisation, a carrot by way of banking transaction tax on 1 Feb?

File image of Prime Minister Narendra Modi. PTI

Speaking in Goa on Sunday, Modi indicated that demonetisation is only the first step in the anti-black money conveyor belt. And that post 30 December, many more financial surgical strikes would continue. That will most likely be on jewellery and the benaami land deals, where most of the black money is parked. Aadhaar seeding of revenue data of agricultural lands and property tax data would be used to weed out the benaami holders, by linking their assets to their PAN card.

All this is going to essentially line the exchequer and will filter down in terms of more social welfare benefits for the poor. But what is in it for you and me, the Form 16 salaried middle class, for who the queue in front of the bank and the ATM have become a home away from home in the last one week.

Admittedly, things have not gone according to Modi's plan. The Finance Ministry and RBI have goofed up in estimating the scale of operations that were needed to roll out the new currency to the public. With most ATMs running dry and people suffering from 'withdrawal symptoms', India is looking like a state running helter-skelter. The immediate priority would be to get things under control, even as a parallel political slug fest plays out in Parliament.

The reason Modi went for demonetisation first instead of say, scrutiny of land deals was to get public mood on his side. Nothing excites a human being and an Indian in particular, than to give him the feeling that Modi will get the rupee from the rich into your pocket. That job is not yet done and Modi has another 42 days to win his fellow Indians over.

If demonetisation and the other measures that will follow can achieve the desired results of bringing in even one third of the black money into the legal system, Modi's purpose would be largely served. It is a tall order. The second step to follow would be to seen as visibly passing on the benefits to the common man.

Depending on the results of the drive till 30 December, one of the very drastic options before Modi could be to scrap income tax from 2017-18 and replace it with Banking Transaction Tax (BTT) from 1 April, 2017. If done, this will be the biggest financial decision since 1991. In one stroke, it will excite the huge Indian middle class. On the face of it, there won't be an incentive to deal in cash any more and every transaction can be shown in the books. Dealing with corruption in the I-T department will also be a thing of the past.

With BTT imposed, it will bring that many more people into a different kind of informal tax net. Revenue generated from income tax was Rs 2.86 lakh crore in 2015-16 and the BTT with a wider base could start replacing it. Besides, revenue can also be generated as they are now, through a more transparent auction of coal and spectrum. A win-win situation for both the government and the people.

Yes, there will be that section of people who do not fall under the tax bracket now and will not like being subjected to a BTT. The poor who were encouraged to open bank accounts under the Jan Dhan Yojna too would resent having been trapped by a tax net. Modi will have to particularly look at how to ensure the poorest of the poor do not feel aggrieved.

In terms of consumer behaviour, this will also lead to a reduction of high value consumption because there would be no more black money to splurge on unnecessary stuff. It will end up making the economy more honest. With no tax burden, there will be more savings by households, which would find its way into investments.

But this comes with a huge risk baggage. If it does not work out, India's economy could simply collapse. A safer carrot for Arun Jaitley to offer would be to adjust the tax slabs and lower rates significantly in order to give more concessions to the salaried class and keep it happy.

This financial year's Union Budget is going to be presented on a different date — 1 February, 2017 instead of on the last day of February. It will be a much anticipated financial document.

For full coverage of Union Budget 2017 click here.

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Updated Date: Jan 13, 2017 20:26:49 IST

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